Sunday, February 8, 2009

What do venture capital analysts do? And why do venture capitalists need them?

The link below is to a blog post from Scott Scheper that answers these questions. First, it sheds some light on the "glamorous" job that the analysts do within a VC firm.

Second, and perhaps most importantly, it illuminates the crucial difference between an angel investor and a venture capital fund. Angel investors typically do not have the infrastructure or desire to perform a proper valuation and financial analysis of the entrepreneur's company. They typically are investing by their gut or with their friend/family/neighbor. If you can sell them on your idea and on you, then you are most of the way there. Venture capitalists, on the other hand, report to a higher power -- their LPs. They usually will have a fiduciary duty to act with care in their management of the funds assets. More importantly, they need to keep their LPs happy so that the LPs will re-up in the next round of fundraising. When a particular deal turns out to have been a bad one, the VC will want to be able to demonstrate what they were thinking at the time they made the investment. This is why they need to do the fulsome valuation analysis.

A third "sub" point -- the article also alludes to the tension between what types of investments an early stage VC fund is interested in and what types of investments an angel may consider. If it can't be shown through a full valuation that the idea has the potential to hit the VC's desired returns, then the investment will not be made. A very exciting idea may not receive interest from a VC because it is either too speculative or because it is not obvious that the desired returns will be there. These sorts of ideas will be dependent on angel funding until they have proven their concept -- or perhaps exclusively until they have the balance sheet for debt or can find an exit through M&A or IPO. For more on the types of returns that different investors seek at different phases of a company's lifestyle, here is a recent blog post of mine.

What do venture capital analysts do? And why do venture capitalists need them?

The link below is to a blog post from Scott Scheper that answers these questions. First, it sheds some light on the "glamorous" job that the analysts do within a VC firm.

Second, and perhaps most importantly, it illuminates the crucial difference between an angel investor and a venture capital fund. Angel investors typically do not have the infrastructure or desire to perform a proper valuation and financial analysis of the entrepreneur's company. They typically are investing by their gut or with their friend/family/neighbor. If you can sell them on your idea and on you, then you are most of the way there. Venture capitalists, on the other hand, report to a higher power -- their LPs. They usually will have a fiduciary duty to act with care in their management of the funds assets. More importantly, they need to keep their LPs happy so that the LPs will re-up in the next round of fundraising. When a particular deal turns out to have been a bad one, the VC will want to be able to demonstrate what they were thinking at the time they made the investment. This is why they need to do the fulsome valuation analysis.

A third "sub" point -- the article also alludes to the tension between what types of investments an early stage VC fund is interested in and what types of investments an angel may consider. If it can't be shown through a full valuation that the idea has the potential to hit the VC's desired returns, then the investment will not be made. A very exciting idea may not receive interest from a VC because it is either too speculative or because it is not obvious that the desired returns will be there. These sorts of ideas will be dependent on angel funding until they have proven their concept -- or perhaps exclusively until they have the balance sheet for debt or can find an exit through M&A or IPO. For more on the types of returns that different investors seek at different phases of a company's lifestyle, here is a recent blog post of mine.

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